Wrong!
Convertibles Run Down Common Stock
By James J. Cramer
8/9/01 5:13 PM ET
URL: thestreet.com
Was out on Wall Street just now. Had to come running back inside. Was afraid I was going to get hit by a convertible!
All of these convertibles are getting done easily, including the Nortel(NT:NYSE) trade, because these converts just bash the common stock in favor of the convertible.
Buyers of convertibles, chiefly, convertible bond arbitrage funds, are flush. Remember: Go where the money is. Those accounts did well last year and had good first and second quarters, and they will lap this Nortel piece of paper up. Once again, what they will do is sell the common stock short against the convertible bond, take the coupon from the convertible and invest the proceeds from the short sale in Treasury bills for a super easy trade.
If Nortel goes up, they will be protected by the convertible feature into common. If Nortel fails, the funds are short common stock and they do OK even if their convert gets killed. The converts are "senior" to the common anyway and you may get something out of it. You won't get anything in the common.
That's what convertible bond arbitrage is. Don't try it at home. They might not let you buy the convert if you are not a sophisticated investor (that's how Lucent's deal was set up, so nobody can sue Lucent or the brokers if Lucent goes bad, as sophisticated people know risks). And you might not get any interest on the short rebate from your broker because he may not give it to individuals. (It's an ad hoc decision; some get it, some don't.)
Who gets hurt? Why the common stockholders, of course. The common stock gets pushed down by the short-sellers, the dilution hurts and the stock gets a lid on it.
But it can get done. So these cash-strapped companies are doing them.
Random musings: I have been selling stocks in my personal account. Are you getting the bulletins about the sales before the sales are executed? You can, of course, with Action Alerts Plus. Click here for more information. |
